Ontario 'cap and and trade' begins Jan 1

Dec 27, 2016 - On the first day of the new year, Ontario will launch its cap-and-trade system on carbon in a bid to vault the province to the front lines of the battle against climate change.

It is the centrepiece of the Wynne government’s Climate Change Action Plan, meant not only to meet tough targets for slashing greenhouse gas emissions but to spark a sweeping transition to a low-carbon society by changing the way Ontarians get around, heat their homes and run their businesses.

The cap-and-trade system is getting high marks from environmental experts, who say it will achieve its central aim of driving down emissions. But critics caution that the plan contains financial pitfalls: A lack of checks means there could be few restrictions on how the government spends revenue raised from the system, while volatility in other carbon markets suggests the amount of revenue will fluctuate wildly.

Cap-and-trade also contains a major trade-off. It will link up with similar systems already in place in California and Quebec, creating a carbon market covering more than 60 million people and making the cost of cap-and-trade cheaper than it would otherwise be. This link, however, will likely mean that, in the short term, Ontario companies will subsidize emissions cuts by firms in California and Quebec more than they will cut their own emissions – helping those other jurisdictions switch to a low-carbon economy before Ontario does.

Glen Murray, Ms. Wynne’s environment minister, insists that this link is necessary. Not only because a larger carbon market produces the sorts of economies of scale that make emissions cuts cheaper, he says, but because, as Donald Trump prepares to assume the U.S. presidency and threatens to roll back any federal action on the climate file, it will be more important than ever for subnational jurisdictions to work together.

“You’re seeing the states become much more activist on climate change, much more determined in the subnational coalitions that exist,” he said. “Since the Paris agreement, the greatest level of action on climate reduction is coming at the state, provincial and municipal level.”

Under cap-and-trade, the Ontario government will set a hard limit on emissions, which will steadily get lower every year. Companies will have to buy permits – called “allocations” – from the province for every tonne of carbon they burn. The cap will mandate emissions cuts to 15 per cent below 1990 levels by 2020, 37 per cent below by 2030 and 80 per cent by 2050. These reductions are sharper than those Ottawa is targeting under its new climate-change deal with the provinces.

The government plans to use cap-and-trade revenues, estimated at $1.9-billion annually, to fund Climate Change Action Plan programs to help Ontarians buy electric cars, give buildings energy retrofits and switch factories to more energy-efficient machinery, among other things.

Linking the market to California and Quebec, starting in 2018, will mean companies from all three jurisdictions can buy and sell allocations to one another. This is meant to make cap-and-trade less expensive by spreading the costs out – the larger the market, the more options there are for cutting emissions.

An Ontario government-commissioned study from consultants EnviroEconomics estimates the price of carbon will be about $19 a tonne in the early years of the program, which would translate to an extra $13 for the average household in higher home heating and gasoline costs. By comparison, a straight carbon tax of the kind advocated by provincial Opposition Leader Patrick Brown would have to be roughly $72 a tonne to achieve the emissions reductions Ontario is seeking.

The drawback to linking with California and Quebec, however, is that it will likely mean more money flowing out of Ontario in the short-term. Auditor-General Bonnie Lysyk last month pegged that figure at $466-million by 2020.

Ontario Environment Commissioner Diane Saxe contends most of this cost will be cancelled out by a reduction in imports of gasoline and natural gas under cap-and-trade – a savings of about $300-million for the province by 2020. But she says paying companies in California and Quebec to cut emissions rather than cutting them in Ontario could mean the province delays by several years the hard work of restructuring its economy for a low-carbon world.

What’s more, California is in the middle of a court battle with a business group trying to shut down cap-and-trade. And the state has not yet passed legislation to make sure the program continues after 2020.

“Too much reliance on California allowances would slow Ontario’s transition to the low carbon economy that’s essential for our future prosperity,” Ms. Saxe warned last month. “There are also legal uncertainties that could undermine the California program or prevent international transfers of emission reductions.”

And the California-Quebec experience has shown that cap-and-trade revenues careen up and down: An auction of allowances by the California-Quebec governments in February, 2016, sold 95 per cent of the permits on offer, but in May, that figure crashed to 11 per cent; in August, it was 35 per cent and in November, it shot up to 80 per cent. This sort of volatility could make it hard for the government to implement the Climate Change Action Plan when it is unsure if it can count on having the money to pay for it.

What’s more, the government has not yet issued a detailed plan explaining how it will make sure the cap-and-trade revenues pay for new programs that cut emissions.

“The government announced its Climate Change Action Plan in June. It’s now December, and they haven’t provided any details yet. Everyone is having a hard time assessing whether or not the cap-and-trade revenues will have good rates of return on greenhouse gas reductions because there’s a huge gap in policy detail,” said Sarah Petrevan, senior policy adviser at green think tank Clean Energy Canada.

For his part, Mr. Murray, the environment minister, is promising a more detailed plan next year showing how each program funded by cap-and-trade will cut emissions.

He also argues that the fears of Ontario businesses subsidizing California and Quebec companies’ emissions cuts are overblown: Most allocations expire after three years, meaning the majority of the excess permits in the joint market will be gone by 2018 when Ontario joins.

“In any given year, whether more [emissions reductions] come from one part of the planet or another is less important than the fact that every year we achieve the maximum number of reductions possible,” he said. “Ontario will have years where we’re a net seller and we’ll have years where we’re a net purchaser.”

Privately, Ontario government sources say they are not worried about the future of California’s cap-and-trade system. Even if the state loses the court case or fails to extend the system past 2020, they believe by that point cap-and-trade will be well enough established in Ontario that the province’s companies can cut emissions without relying on buying California allocations. Plus, by 2020 there may be other states or provinces ready to join Ontario and Quebec’s market.

And cap-and-trade’s proponents contend that the fluctuations in the carbon market are not necessarily a bad thing: If companies are buying fewer allocations, it’s likely because they are instead cutting emissions. And when companies cut emissions themselves, there is less need for the other programs funded by cap-and-trade.

“The fact that prices are low and that demand for permits in the auction has been somewhat low could just reflect that the system is working: Emitters are responding to the system by finding new ways to reduce emissions. They are reducing their own emissions and therefore requiring fewer permits,” said Dale Beugin, research director for Canada’s EcoFiscal Commission. “That’s precisely what’s supposed to happen.”

To the experts, the questions over money are somewhat secondary to the central purpose of cap-and-trade: To achieve emissions cuts.

And no matter how those cuts are made – whether by companies and consumers responding to the carbon price or by government programs – Ontario’s hard cap will make sure emissions fall.

“I worry that when we start getting into conversations about carbon markets and cap-and-trade, it becomes a money conversation,” Ms. Petrevan said. “When, really and truly, cap-and-trade systems are about pricing carbon to add value to the things that don’t produce carbon.”